Confronting the late payment crisis

13th of March 2013

Customers delaying payment is a headache for SMEs at the best of times. With loan pools dry across much of Europe, it is having an increasing, and sometimes calamitous, impact on their finances. Hartley Milner reports on new EU legislation that confronts the late payment crisis.

It’s as much a test of your diplomacy as your patience. How do you remind a customer payment is overdue without triggering that curt response on the other end of the phone that leaves you feeling like you are holding out the begging bowl?

After all, you have dutifully met your obligations, to promptly provide goods or services as ordered, and now you are simply requesting the purchaser honour their side of the agreement. So nothing unreasonable there, particularly since you too have bills and wages to pay and need to keep a close eye on your cash flow.

Most of the time, a quick call or polite email will do the trick. But you are mindful in this tough economic climate that you do not want to come over as too pushy when the client is a major revenue source, however desperate you may be for the debt to be settled.

“Of course you want to maintain good commercial relationships, but we have seen all too clearly how the late payment culture is having a disastrous impact on the finances of businesses, especially the smaller ones,” said Luc Hendrickx, enterprise policy director for the European Association of Craft, Small and Medium-sized Enterprises (UEAPME).

“It also has a cascading effect, because if you are not being paid you struggle to fulfil your obligations to your other customers or pay your own suppliers. It is like a virus spreading through the entire supply chain, causing problems for everyone, and, in the worst cases, threatening their very survival.”

In fact, 57 per cent of European businesses surveyed last year cited late payment as the cause of their liquidity concerns, 10 per cent more than in 2011. More than half of all this debt is owed to SMEs and every day across the continent dozens go bust as a result.

The cost to Europe as a whole is staggering. Written-off debt has soared during the recession to 2.8 per cent of total receivables, and by the end of 2012 had reached an unprecedented level of 340 billion euros – almost as much as the total debt of Greece. Insolvencies lead to the loss of 450,000 jobs in the region and outstanding annual debts of 23.6 billion euros.

And late payment is a particular problem in the south of the Europe where it is severely hampering the integration of the single market, taking on average 91 days for business-to-business transactions to be paid compared to 31 days in the north.

So the cards have always been stacked against you when chasing up your most unpunctual payers – until now.

The EU has reshuffled the pack to deal smaller businesses a stronger hand, crucially setting obligatory payment deadlines for public authorities, historically among the worst offenders. Member states are required to bring in the legislation, a reworking of an earlier directive, by March 16 this year. The new rules say:

• Public authorities must pay suppliers for goods and services within 30 days of receiving an invoice or, in “very exceptional” circumstances, 60 days – and then only if it can be justified and both parties agree. The one exemption relates to public healthcare. Member states can choose a payment deadline of up to 60 days in this sector because of the special nature of hospital services, which are largely funded through reimbursements under social security systems.

• Public authority contracts that set a payment period exceeding 60 days will be considered “grossly unfair”. They will be judged unenforceable and could lead to a claim for damages. The same applies to terms that exclude interest for late payment or compensation for recovery costs.

• Businesses should pay their invoices within 30 days or 60 days at the latest, unless both parties agree to an extension of the payment period that is not “grossly unfair” to the creditor.

• Enterprises are automatically entitled to seek compensation from defaulters. Suppliers can claim a minimum of 40 euros to cover expenses incurred as a result of late payment and any reasonable debt recovery costs.

• The statutory interest that can be claimed on late payment is increased to at least eight per cent above the European Central Bank’s interest rate. And public authorities cannot fix a rate below this threshold.

• It has also been made easier for enterprises to challenge grossly unfair terms and practices in national courts.

• To create greater transparency, member states must publish interest rates for late payment to ensure all parties are informed.

• Member states are also urged to establish prompt payment codes of practice.

• National governments have been given a mandate to go even further, by bringing in legislation that is more favourable to the creditor than the provisions of the EU directive.

Significant improvement

The UEAPME broadly welcomes the changes, which it had a powerful say in formulating. “It was as a result of our proposal that the European Parliament introduced the maximum 60-day rule for payment,” said Hendrickx. “If you compare this with the six to nine months in countries such as Italy and Greece, I think it is significant improvement. We proposed 45 days initially, but at least there are now clear rules and it is a starting point for later negotiations to get the payment period reduced even further.”

But he added: “The big question is – will public authorities put the changes into practice, as they are obliged to do, or try to circumvent them? I suspect some will. But this is something the European Parliament said it will monitor, and we too will be keeping an eye on this and follow up with our member organisations at national level if necessary.”

Taking on the bullies

On business-to-business payments, Hendrickx said: “We know of international industries that say they only pay in 200 days or even longer. We had to fight for these new payment deadlines because there was a whole lobby of these people complaining the rules were against the spirit of freedom of contract. But there is no freedom of contract for smaller businesses when they are bullied into accepting conditions set by bigger ones.”

Hendrickx acknowledged charging interest on late payments could prove a difficult area for SMEs because of their need to maintain good relations. “You can establish an exemption to the 60-day rule in a contract but, again, you have the problem of unequal negotiating power between smaller and bigger businesses, and this could give rise to questions of fairness that can only be settled by a judge,” he said. “We would like to have seen more done to establish a level playing field, but at least it should not be complete anarchy anymore.”

An omission in the new EU legislation that has disappointed the UEAPME relates to late payment by consumers. “The consumer-minded MEPs voted against anything on this being included and the European Commission said it was not a problem,” explained Hendrickx. “It is ridiculous, of course, because we know there is a problem here and a contract is a contract – if you buy something you should pay for it.”

But he stressed smaller companies can do more to help themselves, by taking a more assertive stance in their negotiations with prospective clients and when contracts come up for renewal. Suppliers should set out clear payment terms and send out polite reminders in advance of deadlines, rather than waiting until they have passed before taking action.

Importantly, do not sign anything until you have researched a potential customer’s own liquidity and payment track record. Credit checking agencies know where to look for problems and can save you a fortune in the long term.

And how professional is your credit control? Good credit control works to a system of statements, letters, phone calls and, only as a last resort, legal action. But it can only be effective in the hands of a trained and experienced professional who has the resources and time to do the job properly.

SMEs have received a boost from another piece of EU legislation brought in at the start of this year. This removes the VAT hassle for smaller companies plagued by non-paying customers.

VAT used to be due on invoices at the time they were issued, meaning businesses had to pay it on funds they had not yet received. Now companies with a turnover of less than two million euros need to declare and pay the tax on received payments only, reducing the impact extended non-payment has on their cash flow.

Commissioner for taxation Algirdas Semeta said: “These new VAT rules reflect what businesses in Europe need today – simpler procedures, reduced costs and support in applying solutions that best meet their needs.”